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Traditional Realtors Becoming Blockbuster in a Netflix World? This Court Case is One to Watch

After moving eight times as her husband's job transferred them around the world, Lindy Chapman felt she knew a thing or two about selling real estate.

Unlike her first home purchases, by 2015 she could do most of the initial research online, narrowing her home search to a few contenders before even bothering with a Realtor. Plenty of agents, it seemed to her, no longer did enough work to justify the traditional 6% commission: 3% on the seller's side, and another 3% for the buyer's agent.

So by the time Chapman moved to Dallas — a particularly frustrating relocation in which she ditched her agent and bought a home that was for sale by owner — she got her own Realtor's license, thinking she could do a better job and charge less for it.

"It was obvious on this move that the traditional system no longer operates in line with what the consumer needs in the 21st century," Chapman said. "I literally had everything I needed in the palm of my hand to find homes and all the related facts. I just needed someone to open doors, write the contract, and connect me to schools and the community."

But in trying to offer cheaper services to others, Chapman realized just how entrenched the commission structure is. When she listed homes for sale, the system boxed her in: If she didn't offer the standard 3% to buyers' agents, she worried they wouldn't show the home to their clients.

"The client wants Netflix and the technology for Netflix is here," Chapman said. "And it's like Blockbuster saying, 'no, this is the only way to watch videos.'"

A wave of disintermediation has squeezed margins in many sales and advisory professions. Travel agencies have shrunk from 100,000 employees in 2000 to 53,000 in America today, as websites like Expedia, Priceline and Kayak have allowed travelers to book their own itineraries. Financial advisors, who used to charge between one and two percent of the assets they managed for clients, have been shifting to fee-for-service models in order to compete with automated advisers and low-cost index funds.

Real estate agents have been a puzzling exception to that trend. Half of buyers now find their homes independently online, according to a survey by the National Association of Realtors. Yet 87% of them still end up retaining an agent, and the commissions rates have barely budged. According to data collected by the brokerage consulting firm T3 Sixty, the average commission has declined from 6.1% in 1991 to 5.1% in 2016, but most of the drop came in luxury homes. On a $310,000 house — the median home price in America — a 6% commission comes to $18,600, and it's usually baked into the price of the home.

The ability to make a decent living has kept drawing people to the profession. The National Association of Realtors now has 1.36 million members, surpassing the previous height reached during the the housing boom.

It's not always a full-time gig. About 6 million homes are sold in the US per year — amounting to just a few transactions per agent on average — but the median annual income for real estate agents is still $50,300, according to the Bureau of Labor Statistics. For decades, Realtors' earnings have been maintained through an opaque structure that allows home shoppers to believe that the seller covers the agents' costs, and that the consumer has little choice in the matter.

That entire system could crumble, if a trio of recently-filed lawsuits are successful.

In a complaint filed in early March in the Northern District of Illinois, five law firms teamed up to allege that high commissions were a result of collusion by the National Association of Realtors and the nation's largest brokerage franchises in violation of federal antitrust laws. The firms include heavy hitters like Hagens Berman, which boasts work on cases including the state tobacco lawsuits that led to a $206 billion settlement, as well as Cohen Milstein, which co-led a case against Apple for monopolizing the market for e-books.

The class so far consists of just one person — a home buyer in Minneapolis. But the lawyers are currently recruiting more plaintiffs, and stand to gain millions in attorneys' fees if a jury awards damages. In April, two nearly identical lawsuits were filed, one by two home sellers in Missouri and one by a Minnesota corporation.

On the other side of the suits, the National Association of Realtors is a powerhouse trade group organized in active chapters across all 50 states. It spent about $150 million on federal lobbying and elections in the 2018 cycle, according to the Center for Responsive Politics. More importantly, it also controls access to the Multiple Listing Services that Realtors need in order to list and show homes.

A NAR spokesman responded that the suit is "utterly without merit," and that the current system "promotes efficiency and helps advance the best interests of all clients." The association also distributed an FAQ for its members on what they should know about the case, saying that the complaint is "wrong on the facts, wrong on the law, and wrong on the economics."

But it's still sending shivers through brokerage offices, which have a lot invested in the status quo. Without it, the United States could end up looking more like Australia and the United Kingdom, where buyers' agents are rare. In most developed countries, according to a survey by the discount brokerage Surefield, commissions range between 1% and 4%; buyers depend much more on online portals to find their desired home and seller's agents can represent both parties.

"It kills the industry," said Rob Hahn, a real estate marketing consultant with the firm 7DS Associates, who predicts the number of people in the profession would drop to just 200,000 if the lawsuit is successful. "A lot of things that we as consumers value go away."

That's where the lawsuit comes in.

It begins with a professional land surveyor in Minnesota named Christopher Moehrl who bought a house in 2017, with a combined commission of 6%. The class action case alleges that the NAR, in requiring MLS listings to include a uniform offer of compensation to buyers' agents, is functionally fixing prices. Moehrl did not respond to CNN Business' request for an interview, and the legal teams representing him said he would not grant one.

"If buyer brokers were able to do this job for the same percentage as they did 20 years ago, and the internet has made their jobs a lot easier, and real estate values have appreciated, here is an artificial impediment to competition," said Benjamin Brown, an attorney with Cohen Milstein, one of the five law firms on the case.

If there were no such rule, the complaint argues, agents would be paid in the same way as any service provider: Through a price disclosed at the outset, which would allow the consumer to shop around. The suit seeks damages to be determined at trial, but Brown says they could range into the billions of dollars.

Plenty of buyers and sellers would likely balk at paying tens of thousands of dollars to someone who may have put in very little work on their behalf. That would drive many buyers' agents out of the profession, which some economists have argued would actually be more efficient, since the high commissions have drawn in more agents than are actually needed to keep the market functioning.

Realtors have several responses to this contention.

First they argue that they do lots of work for clients. On the buyer's side, they say, consumers still need help sorting through everything they read on the internet in order to make a wise decision. After all, they argue, buying a home is often the largest purchase a person will make in their lifetime, with potential pitfalls ranging from disputes over repairs to sudden problems with financing.

"Many of them don't know what to look for and are overloaded with information," said Russ Cofano, a consultant who has run a state Realtors association as well as real estate tech companies. "I think if you asked a lot of buyer agents today, they would say their job is harder. Even though they're engaging with buyers later in the process, they're having to do a lot of course correction."

On top of that, since traditional agents don't get paid unless their client goes through with a purchase, they have to offset all the work they do for clients who never end up buying.

Plus, closing costs are high enough already, with fees for the title company, appraisals, inspections, etc. Having the seller technically pay for the commission allows it to be tacked on to the mortgage and paid over time rather than all at once like a regular fee.

"It's tough to shoulder that cost out of pocket," said Austin Guy, who runs a real estate software company called Homebloq. "If we're going to put all that on buyers, they're sort of screwed here. The risk is, what you think is going to work out better for consumers from a competitive standpoint might end up hurting them." (Guy does think there should be more transparency, however.)

And finally, defenders of the current system argue that consumers do bargain over fees. It may happen up front when the buyer contracts with an agent, or at closing, when both agents will cover any number of expenses — from a new fridge to a thorough cleaning — in order to get the deal done. None of that, they say, is captured by the incomplete, approximate statistics gathered by industry analysts.

"What's offered in the MLS is something that can ultimately be negotiated during the course of the deal," said Rebecca Jensen, CEO of the Chicago-area MLS. "At the end of the day, the check that goes to the buyer's agent is less than that."

It's difficult to tell how widespread negotiation is. One 2009 study paid for by NAR found that commission rates do tend to vary with housing prices, which would suggest that Realtors relax their fees on very expensive homes, and charge more in down markets when homes are harder to sell.


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